This paper proposes a technique to derive the optimal surrender strategy for a variable annuity (VA) as a function of the underlying fund value. This approach is based on splitting the value of the VA into a European part and an early exercise premium following the work of Kim and Yu (1996) and...

For variable annuity policies, management fees for the most standard guarantees are charged at a constant rate throughout the term of the policy. This creates a misalignment of risk and income - the fee income is low when the option value is high, and vice versa. In turn, this may create adverse...

The Chicago Board of Options Exchange (CBOE) advocates linking variable annuity (VA) fees to its trademark VIX index in a white paper (CBOE, 2013a, b). It claims that the VIX-linked fee structure has several advantages over the traditional fixed percentage fee structure. However, the evidence...

We study a portfolio optimization problem involving the rational policyholder of a variable annuity with a guaranteed minimum maturity benefit. This financial guarantee is fi nanced via a fee withdrawn directly from the investment account, which impacts the net investment return. We propose a...

We study properties of the Rearrangement Algorithm (RA) in the context of inferring dependence among variables given their marginal distributions and the distribution of the sum. We show that the RA yields solutions that are “close to each other” and exhibit almost maximum entropy. The...

The bounds for risk measures of a portfolio when its components have known marginal distributions but the dependence among the risks is unknown are often too wide to be useful in practice. Moreover, availability of additional dependence information, such as knowledge of some higher-order...

Assuming that agents' preferences satisfy first-order stochastic dominance, we show how the Expected Utility paradigm can rationalize all optimal investment choices: the optimal investment strategy in any behavioral law-invariant (state-independent) setting corresponds to the optimum for an...